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Why Morocco Is Loosening Its Grip on Its Currency: QuickTake Q&A

(Bloomberg) -- Morocco is easing its hold on the dirham. A move to widen the currency’s trading band is part of a plan to liberalize the economy and turn the North African nation into a financial hub. Tweaking the dirham’s peg has been talked about for years, but the idea was postponed in 2017 after fears of a devaluation prompted a rush for dollars and euros, causing a plunge in foreign reserves. So this time the authorities took a different tack, minimizing the opportunity for mischief, trading and speculation: They announced the plan, to take effect on Monday, on Friday night.

1. What did the government announce?

A widening of the dirham’s trading band to a maximum daily limit of 2.5 percent above or below the official rate -- up from 0.3 percent. So the dirham will be allowed to move as much as 5 percent a day versus 0.6 percent before.

2. How does the peg work?

Bank Al-Maghrib, as the Moroccan central bank is known, pegs the dirham to a two-currency basket weighted 60 percent to the euro and 40 percent to the U.S. dollar. Every day, the central bank sets a reference price for the dirham. The regulator didn’t say if it intends to adjust the peg as it moves to the new system. Officials and analysts have said that unlike Egypt, whose currency plummeted by more than 50 percent after restrictions were removed in November 2016, a flexible dirham doesn’t necessarily mean a weaker one.

3. Was the move urgently needed?

Not at all, according to most observers. As Charles Robertson, Renaissance Capital’s global chief economist, put it: Morocco’s policies were “working excellently. They have a fairly valued currency, a good current account position, decent growth, low inflation.”

4. So why do it now?

Making the change during a crisis can be messy, as Egypt showed. Morocco’s economic conditions offered a “unique” opportunity to move toward currency flexibility in an orderly manner, according to the International Monetary Fund. Currency pegs put a central bank at the mercy of other countries’ monetary and fiscal policy and lessen the freedom to respond to domestic goals, such as reviving growth, creating jobs or containing prices. In the long term, the move will allow Morocco to “react more effectively to international shocks given its significant external exposure via exports, remittances, tourism and oil imports,” said Hasnain Malik, head of equity research at Exotix Partners LLP.

5. How will the change affect Morocco’s economy?

Given the limited size of the dirham’s new trading band, the new regime is unlikely to have a big impact on inflation, growth and the economy in general, according to Reham El Desoki, a senior economist at regional investment bank Arqaam Capital. The move, however, is “significant because it marks a shift in policy and sends a signal of commitment to reform,” she said.

6. Will this help turn Morocco into a financial hub?

That will require broader changes. Establishing legal and regulatory credibility for the finance sector and full foreign ownership in that sector would help transform Morocco, according to Exotix’s Malik. The stock market is dominated by big local financial institutions, which reduces liquidity and accessibility. What it lacks is a “lot of liquid and cheap equity stories,” he said.

7. Will there be more reforms this year?

The focus, says Mohamed Abu Basha, Cairo-based economist at EFG-Hermes, will probably be on ensuring a smooth transition as more volatility is introduced to the currency market. There might also be a gradual loosening of capital controls to make the stock market more accessible, he said.

8. Are more countries freeing up their currencies?

Though the currencies of most large countries and the 19-nation euro float freely, the trend began to move in the opposite direction in the messy aftermath of the global financial crisis. Forty percent of countries monitored by the IMF gave the market free rein in 2008, but that figure fell to 34 percent in 2014 before rebounding to 37 percent in 2016.